Millions of Students Borrow Trillions of Dollars

By Cynthia Nagrath

01/01/2012

For the first time, student loans surpassed credit card debt according to the N.Y. Federal Reserve Bank. Experts predict the figure to top the one trillion dollar mark early this year. Considered by many as the next big credit bubble, the sheer scope of the debt crisis is a source of concern for educators leaving parents and students wondering if a college education is worth it.

With the average American household bringing in $50,221 a year, many parents face a serious dilemma on how they will pay for their child's college education. “What happens when their child gets accepted into the college of his or her choice only to discover that it costs over $50,000 a year?” asks Forrest Broman, President of The International Educator, a newspaper that reports on news and trends in the field of international education.

“Even with scholarships and financial aid that still leaves a huge out-of- pocket expense, one for which most families are unprepared for,” said Mr. Broman. “Double or triple that amount if they have more than one kid of college age, or approaching college-age,” he estimated. What does that leave cash-strapped families to do? Borrow.

This is something that Americans have done with great zeal over the past 20 years, and now borrowing for college education has reached an unprecedented rate. In late October USA Today reported that the New York Federal Reserve's latest summary on Household Debt and Credit, finds that for the first time the amount of student loan debt will surpass the $100 billion mark. Analysts project that the total outstanding balance will exceed $1 trillion by early 2012.

The U.S. student loan debt makes the Greek debt crisis pale in comparison. To put this in perspective, the original Greek bailout loan was in the neighborhood of $138 billion (and even with an additional $150 billion potentially on offer), it’s a mere fraction of what middle class Americans are accruing in student loan debt alone.

“This is a national crisis of epic proportions,” asserts Broman because “unlike credit card debt, student loan debt is unforgivable and young people graduating with freshly minted degrees are finding the tight job market is forcing them to take jobs that make loan repayment difficult and achieving independence next to impossible.”

This view is backed by a 2011 study by the John J. Heldrich Center for Workforce Development at Rutgers University, which revealed that only 56 percent of 2010 graduates were successful in finding a job post-graduation. "It's going to create a generation of wage slavery," says Nick Pardini, on his financial blog. This graduate student of finance at Villanova University has warned that “student loans are the next credit bubble — with borrowers, rather than lenders, as the losers.”

Many young adults are finding that they are not able to pay the loans while trying to meet their other expenses. The U.S. Department of Education reported in October that 320,000 student borrowers who began paying off their student loans in 2009, already defaulted by 2010 – only a year later. This represents an increase of 80,000 defaults in one year which accounts for approximately 10% of all borrowers. “To think that one out of ten students who take out a student loan have, or will end-up in default, should be a huge wake-up call to educators everywhere,” Mr. Broman warns.

Forrest Broman, President of The International Educator, has dealt with hundreds of high school students over the years in his capacity as director of international schools in various countries. “As an educator, Mr. Broman says, "It’s a tricky balancing act advising students to go to the best school they can get into while knowing this advice can possibly burden them with years of debt.” According to Mr. Broman, “It’s no longer adequate for guidance counselors, to simply recommend the best schools a student should apply to, the whole financial piece must be brought into the early planning stages of college selection.” This is a troubling situation because defaulting on student loans can leave a young borrower in financial ruin. Not only will the defaulter rack up additional penalty charges adding to the cost of the loan, but lenders have the authority to garnish up to 15% of their wages. If that were not enough, failure to pay student loans can give the IRS authorization to intercept tax refunds.

The young college graduate who defaults will find that moving ahead in life will be difficult because his or her credit score will be affected and it will be next to impossible to obtain further credit. “It’s disheartening to think that young people’s financial picture can be so adversely affected by their student loan debt," says Mr. Broman. “But if managed well, students should know that the benefits of a college education will indeed pay off across a lifetime.”

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